While all investors are likely concerned about the fallout from a potential FOMC interest rate hike as early as September, perhaps no demographic of the investing world is more concerned than biotech shareholders. Biotech stocks have long been seen as high-risk/high-reward stocks. Therefore, should biotech investors be worried about the potential "risk-off" trading environment following the Fed’s first rate hike?
Historical Correlation
Bank of America analyst Ying Huang looked back at the sensitivity of the Nasdaq Biotechnology (INDEX: NBI) index and large-cap biotech stocks Amgen, Inc. AMGN, Celgene Corporation CELG, Biogen Inc BIIB and Gilead Sciences, Inc. GILD to interest rate hikes over the past 20 years.
Large Caps, Less Sensitivity
Huang’s analysis of large-cap biotech stocks showed that they all had a higher negative correlation to interest rates when they were smaller companies. This theory suggests that sticking to large-cap biotech names, such as the ones mentioned above, would be the best way to invest in the sector heading into the next rate hike.
Stock Picks
Overall, Bank of America is bullish on large-cap biotech stocks. “Fundamentally the large-cap biotech group is strong given earnings power, new product launches, more predictable regulatory environment, aging population, higher utilization of healthcare, and a renaissance in R&P productivity,” Huang explained.
Bank of America’s top biotech stock picks include:
- Alexion Pharmaceuticals, Inc. ALXN
- Regeneron Pharmaceuticals Inc REGN
- Biogen
- Celgene
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